Joann C. Arnes v. United States

The issue in this case is whether a taxpayer must recognize for income tax purposes the gain that she realized when, pursuant to a divorce settlement, a corporation redeemed her half of the stock in the corporation, the remaining stock of which was owned by her former husband. The district court, ruling on cross-motions for summary judgment, held that Section 1041 of the Internal Revenue Code of 1986 (I.R.C.) relieved the taxpayer of having to recognize the gain, and awarded the taxpayer a refund of $53,053 for 1988.

The district court had jurisdiction over the taxpayer’s claim pursuant to 28 U.S.C. § 1346 (a)(1) (1988). We have jurisdiction over the Government’s timely appeal pursuant to 28 U.S.C. § 1291 (1988). We affirm.

I.

Joann Arnes, the Taxpayer-Appellee, married John Arnes in 1970. In 1980, they formed a corporation, “Moriah,” to operate a McDonald’s franchise in Ellensburg, Washington. That corporation issued 5,000 shares of stock in the joint names of John Arnes and Joann Arnes. In 1987, the couple agreed to divorce. McDonald’s Corporation required 100% ownership of the equity and profits by the owner/operator, and informed John Arnes that there should be no joint…